VAT raise not “unavoidable”

ATTENTION NEWSDESKS

For Immediate Release

Demos: VAT raise not “unavoidable”

Raising VAT to 20 per cent is not an unavoidable measure to address the deficit, says the think tank Demos, responding to the June Budget. Analysis from Demos shows that a progressive approach to balancing national finances could and should come from focusing on tax rises.

Kitty Ussher, chief economist at Demos said:

“Putting up VAT was entirely avoidable. Demos analysis shows how tax on unearned wealth and carbon could have been raised instead. This VAT rise, combined with benefit cuts, will hit the poorest hardest and could cause a double dip recession.

“The Chancellor’s Budget seems obsessed with shrinking the state, precisely at the time when the role for Government is to stimulate the economy. Indeed the effect of the Budget is to lower growth in 2011 and to raise unemployment.

“The Government’s own figures show that the poorest in the country are the worst affected by the Budget, mainly from the increase in VAT.

“We will see a greater contraction in consumer confidence as already-stretched households face the threat of unemployment from large and unspecified public sector cuts, rising prices from VAT increases and real-terms benefit cuts – as the Office of Budget Responsibility shows.

“Raising VAT to 20 per cent is a regressive taxation, hitting the poorest hardest. The hike also harms growth, taxing consumption when the economy demands that household spending increases.

“The Government should have gone further with Capital Gains Tax rises; it would have been preferable to tax gains on the unearned wealth of primary residences.”

Green taxes

Demos welcomes taxing air travel on a per-plane, rather than per-passenger basis as a step towards the greener economy the UK will require for future growth. But the Chancellor should have gone further and put a price on carbon to encourage behaviour change.

Public Sector Pay

Demos welcomes the commitment to ensure that the public sector pay ratio between top and bottom earners is limited to 20:1. Research from the Progressive Conservatism Project at Demos called for public sector pay ratios and argues the differential should be closed further.

Universal Child Benefit

By freezing Child Benefit rather than means testing it, the Chancellor is missing an opportunity to make the benefit system fairer, although Demos welcomes the fact that poorer families are more than compensated by the increase in the child element of the Child Tax Credit.

Sonia Sodha, head of the Public Finance Programme at Demos said:

“Raising tax free personal allowance shows a progressive philosophy that has failed to spill into other areas of economic policy.

“We were warned to be prepared for the worst, but the worst is yet to come. The Autumn Spending Review’s 25 per cent cuts across most departments will – like today – hit the poorest hardest by squeezing even the most vital services.”

Notes to editors

Last week Demos called for greater emphasis on tax rises for the better off to avoid a double-dip recession.

Demos says the Chancellor should commit the Government to reducing the deficit with a balance of 67:33, rather than the 80:20 ratio, between spending cuts and tax rises.

Increased revenue could come from:

- Aligning CGT rates with income tax rates and introducing CGT on sales of primary residences (raising around £6.5bn)

- Raising the basic rate of income tax by 1p to 21p (Raising 4bn)

- Introducing a per tonne carbon tax, with compensatory measures for the less-well off (could raise around £3bn)

- Move from per-passenger air duty to per-plane air duty (Raising £3bn)

- More congestion charging by local government (Saving central government £2bn)

Demos also recommends progressive spending cuts like abolishing Child Benefit for high earners (with compensation for the less well off) that would save £7bn.

Demos’ analysis builds on recent work by the National Institute for Economic and Social Research, arguing that the economy would benefit from a far greater proportion of the budget gap being met through tax rises rather than spending cuts.

Demos uses a Budget target of an extra £34bn a year, in line with IFS calculations, and lays out recommendations to balance the Budget based on progressive tax rises and selected cuts.

The Demos Illustrative Plan for Deficit Reduction

The Demos plan for deficit reduction presumes savings of £34bn per year are required on top of the £51bn already announced in the March 2010 budget.

Demos stresses that Government should seek to avoid cutting jobs that already exist and should not prioritise any further cuts to public sector pay or services beyond those already announced. Spending cuts could come from:

Cuts already announced – £6bn

Postpone up to a quarter of capital spending – £6bn

Scale back public sector pensions in advance of long-term review – £2bn

Local government to raise more finance through congestion charging – £2bn

Abolish Child Benefit for high earners, with compensation for the least well off – £7bn

TOTAL: £23bn

To meet the 67:33 ratio £17bn of tax rises are necessary: A third of £34bn, to which is added the £6bn gap from the coalition’s pledge to reverse Labour’s planned rise in National Insurance.

Demos’ indicative tax rises are based on taxing the better off, in particular those who have become wealthier through unearned rises in the value of their housing, with a small increase in tax for all those who work on moderate and high incomes. Tax policy is also used to achieve wider environmental and social goals. On this basis, increased revenue could be raised from the following areas:

Capital Gains Tax reform: charge CGT on primary residences when sold and align all CGT rates with income tax rates – £6.5bn

Raise basic rate of income tax by 1p – £4bn

Tax on rented properties that do not meet decent homes standard – £0.5bn

Move from per-passenger air duty to per-plane air duty – £3bn

Carbon tax – £3bn

TOTAL: £17bn

Looking to the longer term, Demos recommends the Government should also work for an international agreement to a very small financial services transaction tax which has the potential to raise very large sums of money without distorting economic activity.

Steps should also be taken now to reform and integrate the whole tax-benefit system so that all benefits and tax credits can be integrated to remove barriers to work and make it straightforward to alter the revenues and costs to government depending on the economic and fiscal circumstances.